What Is a Bondholder?
A bondholder is an individual who owns a bond. A bond is a type of loan that is issued to an agency as opposed to a personal loan. Although there is the promise from the borrower that you will receive money from the bond's issuance, there is still a risk involved when purchasing it. Therefore, it is vital that you monitor your portfolio on a regular basis and have other sources of income.
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Bond Facts
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Just as small businesses need loans, public agencies and bigger corporations need startup money or funds to keep them afloat. When a bond is purchased, the money goes to the agency as a type of loan. Investinginbonds.com notes that a bond is like an I.O.U. The life of the bond depends on the initial agreement. During this time, the borrower pays out interest, similar to any other loan. You can purchase a bond through a financial brokerage firm or through a bank.
Role of a Bondholder
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A bondholder is the person to which the bond is issued. The bondholder gains interest that the borrower pays back on the bond. Also, once the bond reaches maturity, the bondholder has the option of a payout or can save it for retirement. In other words, you receive the principal balance of the bond plus interest. If the borrower defaults on payments, the bondholder has the right to liquidated assets as compensation for his loss.
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Types of Bonds
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There are three types of bonds: government, municipal and corporate. A municipal bond is issued by the local government as opposed to a regular government bond. You can also invest in foreign bonds although they are riskier since foreign currencies can fluctuate. Foreign bonds are also more difficult to enforce. If the company folds, you may not have the same rights to its assets as you would in the United States. AllBusiness.com reports that the safest type of bond to invest in is a government bond. Municipal bonds are second in terms of security, and corporate bonds carry the highest risk.
Misconceptions
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Bonds are not the same as stocks. They are similar in that an initial investment is required. However, stock is considered a partial ownership of a company. If the company fails, you lose out on funds as well. If an agency that issued you a bond fails, you have the right to its assets to make up for the loan default. Although bonds are safer than stocks, they still come with risks. According to AllBusiness.com, the borrower may default on payments, causing you to lose your investment.
Considerations
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AllBusiness.com recommends that you purchase bonds if you are looking to utilize them for retirement funds. Bonds are a safer option than stocks in this case because their face value is a fixed rate. If you invest primarily in stocks for retirement savings, you risk losing potential income if there are any downward fluctuations in the stock market. As you near retirement, you might consider moving funds from stocks to bonds for a more secure income.
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References
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